Setting up for a Rebound

The VIX needs to move and close under it's 10-day exponential moving average before I express any confidence in higher prices

By Paul Cherney

The market's rebound in Wednesday's session was only intraday. The VIX is going to have to start a move below its 10-day exponential moving average before I have any confidence in the upside for the markets. Near Wednesday's close, the 10-day exponential moving average of the VIX was 39.77, so it's going to take a move below this level intraday to indicate that at least the short-term tide in prices has the potential to reverse (from lower prices to higher prices).

The caveat remains, with such a high 10-day moving average, that it is not a healthy sign to see the VIX cross under its 10-day moving average and then move back above this measure for more than two consecutive days. I would need to see the VIX move and close under it's 10-day exponential moving average before expressing any confidence in higher prices, regardless of previous VIX crossings and studies.

This is the week of the the September Triple Witch. Over the past 62 Triple Witch Thursdays, 56% of the time the S&P 500 has posted closing gains on the Thursday of the Triple Witch. (Remember though, most of these data points were in bull trends during the market).

For readers who look at the CBOE put/call ratios: in a bear/transitional market, high P/C ratios only represent the potential for buying, but today, the high ratios were accompanied by an expansion in the total volume of puts traded at the CBOE, and this is creating a technical condition which often arises within days of a bottom.

Years ago, John Bollinger made the following observation about put volume. He noticed that often, price reversal points in the markets can happen within days of the following technical condition: a trade day when the total put volume for the day was equal to or exceeded two times the average total put volume of the past 10 days. On July 19, just three days before the July 24 reversal lows, the total put volume on the day was 1.88 times the trailing 10-day moving average of total put volume.

In Wednesday's market, the total number of put contracts traded as of 4:00pm EDT was 785,000, which is more than twice the trailing 10-day moving average of put volume. This has established the technical potential for a reversal in prices within a few trade days.

I'll be watching the VIX for a move under its 10-day and I think it would help if we could see a trade day which opens lower and then drops lower for a close near the worst levels of the session.

SUPPORT:

  Immediate support for the S&P 500 is 876-833, with a focus of support 868-854. Immediate supports for the NASDAQ are 1253-1233 then 1214-1192.

RESISTANCE:

  Immediate intraday resistance for the S&P 500 is 882-898 then 909-928, with a focus 923-928. Immediate resistances for the NASDAQ are 1265-1280, 1288-1298, and 1319-1350.92 with a focus 1346-1350.92.

The study I have referenced about the excessive number of new lows at the NYSE (On July 24, the stocks hitting new 52-week lows represented 26.7% of all the stocks traded at the NYSE. There is regular repeated pattern of price action which usually follows such an extreme reading: repeated tests of the price range generated on the day of the lows is the norm). This study remains in effect and valid. It is still likely that the S&P 500 is going to print inside the 844-775 trade range.

Cherney is chief market analyst for Standard & Poor's